Why Does Digital Marketing Cost So Much?

Let’s be clear: digital marketing isn’t cheap. If you’re a small business owner, any four or five figure expense is something you’ll reasonably view as painful and expensive. However, it’s also important to approach any form of marketing not only by asking “what’s the cost?”, but also by thinking “what can this do for my business?” Digital marketing is a good investment for some businesses and a poor investment for others. So how do you identify where your business falls? Measurement is the key. Any business that isn’t measuring what’s coming in and what’s going out isn’t going to be in business for long. So rather than measuring the costs on their own, here’s how you can look at your next marketing investment in a way that measures your business outcomes.

Time to Do Some Math

Let’s start by sketching out the numbers that will help you measure the costs and benefits of any marketing plan, and the questions they answer.

Customer Acquisition Cost:

How much does it cost to win a new customer?

Lifetime Customer Revenue:

How much average revenue is generated from a new customer, over the lifetime of the relationship?

Gross Margin:

How much does it cost to service that new customer?

Goals:

Where do we want our business to be in the future?

Bear in mind that we’re simplifying things here. Many businesses have different models, and use more complex formulas. My goal is to help bridge the gap between the data quality problems that affect so many purchasing decisions.

Customer Acquisition Cost (CAC)

As the old cliche goes, “you have to spend money to make money”. Marketing is never free, as much as any of us business owners would like it to be. Neither are the salaries or incremental costs incurred by staffing your sales team. Which means that it costs money to attract any new customer. Here’s a very boiled down version. To find your CAC, you want to take your sales and marketing costs, and divide by the number of new clients you’ve earned. This will give you the simple view of a number that you can use as a baseline. You can then start breaking your CAC down further by marketing channel, tactic, year, and more. Kissmetrics has a great resource on this subject if you want to dive into CAC further.

Customer Lifetime Revenue (CLR)

This is not to be confused with customer lifetime value, since “value” implies profitability and/or margin, but that’s the general direction we’re heading. What we are trying to find out here is how much new revenue is going to be generated by a new client, across the lifetime of your relationship. Sometimes a relationship is a one-time purchase, sometimes there are multiple purchases, and other times it’s ongoing.

Gross Margin

Once you know how much it costs you to obtain a new customer, and the revenue a new customer brings, you finally need to account for the costs incurred by servicing this new customer. The difference between CLR and your gross margin is what you’ll use to pay all rest of your bills and overheard – or to reinvest into additional marketing tactics and future growth. More on that in a moment.

Last But Not Least, Set Some Goals

By looking at the above three factors, you’ve developed some historical data that you can use to benchmark and baseline your future efforts. That’s great. Now it’s time to think about the future and develop some goals. How much do you want to grow? How much will the existing marketplace allow you to grow? What are the direct and associated costs that you expect to incur by going after this goal? In the end, without having some goals to work towards and understanding the factors that go into reaching these goals, most businesses will fall short. Keep in mind, not all goals have to be growth-oriented – goals can be created around any facet of your business.

Now It’s Time to Track Things

It’s easy to make decisions based on feelings and emotions, but you’re more likely to reach your goals when you make decisions based on reliable data. So how do we make sure we’re tracking things effectively? This all starts with the marketing goals that are being set. Once again, those can vary wildly across the board depending on what the business goals you’re working towards. For the sake of this example, let’s assume our goal is to grow total leads by 25% over the next year. This means that the three main areas that we’ll want to pull data from are our CRM, our analytics, and phone call tracking. Remember, if we don’t track things properly, we’ll never know if we reached our goals.

How Did We Do?

One of the best things about tracking properly is that it helps us fail faster. Weird to think, isn’t it? If the goal for the whole year is to improve leads by 25% and we wait until the end of the year to figure things out, then clearly, we’ve failed either way. There are so many things we can learn by taking the simple step of figuring out how we’re going to measure things, but it all starts with the decision to measure. By checking in on the efforts on a regular basis, it allows you to be more nimble with your marketing spend and adjust accordingly. For example, if we’ve established a baseline for the cost for a new customer, now we can see how our current marketing efforts doing compared to that baseline. Have we considered adding assisted conversions and multi-touch attribution in our modeling? Have we allowed enough time to quantify results based on the length of our average sales process? The questions are really limitless, but we’re jumping in with blinders on without having the data to help support our decisions.

The Moment of Clarity

Boy do I wish it was just that simple and could tell you that there is an exact moment of clarity, but it’s certainly easier once you have made goal setting, tracking and measurement an integral piece of your business. Now that you have some benchmark numbers you can use to compare lead channels to, you can start to forecast based on the outcomes rather than the costs. With digital marketing efforts there is search volume. With television there is Nielsen ratings to measure audience reach. With newspapers and magazines there is a circulation count. All of these can be used to help build out a model on the outcomes that can be achieved with an investment into these marketing efforts. Certainly cost is a component of the calculations, but it’s secondary to the outcome.

It’s Easy to Measure a Cost

And much harder to measure benefits. However, if you makes your investment decisions based on thoroughly thought-out business goals and well tracked data, you’ll be able to identify in any marketing campaign is a smart investment for your business. Of course, the big question you ask after you’ve looked at costs and set your goals is “how long is it going to take to get there?” Read our e-book to find out.